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SGI Cuts Work Force in Attempt to Right the Ship

Silicon Graphics is cutting 12 percent of its work force as part of an overall restructuring plan designed to save the company $150 million by the end of the year.

Struggling Silicon Valley giant Silicon Graphics is cutting 12 percent of its work force as part of an overall restructuring plan designed to save the company $150 million by the end of the year.

The Mountain View, Calif., company announced March 3 that it is cutting 250 positions as part of the restructuring, and also said that its chief financial officer and chief operating officer are leaving.

The news comes about a month after Dennis McKenna took over as CEO for SGI, which once was a major player in the world of high-performance computing but has seen its fortunes fall in recent years with the rising popularity of volume servers.

In addition, in early February, SGI filed a 10Q regulatory document with the federal Securities and Exchange Commission outlining its current financial situation as well as some possible future moves, including bankruptcy or a sale of the company if its restructuring plans fail.

The message of the document was that unless SGI can substantially turn around its finances this year, the future is bleak.

In announcing the moves March 3, McKenna said he first needed to get a business plan in place.

"As promised in late January, the goal for my first 30 days at SGI was to solidify a strong business foundation and assemble an organization that is laser-focused on execution," McKenna said in a statement. "Weve made tough decisions."

The layoffs in the United States occurred March 2, said SGI spokesperson Caroline Japic. Job cuts overseas will take longer, she said. The 250 jobs represent 12 percent of SGIs work force.

Charles King, an analyst with Pund-IT Research, said McKennas initial moves make sense. The key will be what he does after cutting expenses.

"Dennis McKenna obviously has to do something dramatic," said King, in Hayward, Calif. "Hes doing what any CEO would do in this situation, where hes announcing management changes and cutting a significant amount of the work force."

King equated it with what Mark Hurd did when he took over as president and CEO of Hewlett-Packard. Several months after assuming the job, Hurd announced a restructuring designed to make HP a more efficient company. That plan includes cutting 14,500 jobs.

However, Hurd has a lot more to work with at HP than McKenna does with SGI, King said. Also, such expense-cutting plans are only sustainable for so long. Eventually, SGI will have to start making money again, which means developing products people want to buy, he said.

SGI was a major player in the 1990s, when it was focused primarily on the visualization space, King said. However, company officials, seeing the increasing popularity of x86 volume systems, started branching out in that direction without adequately explaining to existing customers the value of the shift. By doing so, SGI weakened its strong foothold in the visualization space. "They are a great example of what happens when a vendor that historically specialized in developing proprietary, high-end sort of products tries to move down-market into volume systems," he said.

SGIs move into volume systems is similar to what Sun Microsystems is trying to do with its servers running on Advanced Micro Devices Opteron chips. However, the issue of the size of the company again plays a role.

"Their market share has fallen off, and the problem is that as they become less and less of a player and less and less of a presence in the market, its hard to turn around from that," King said.

Part of SGIs announcement March 3 included McKennas plans to focus its product portfolio. One step SGI will take is consolidating its server and visualization platforms and increase its presence in the visualization space by focusing on partnerships based on open-source and industry-standard technology.

"We are really responding to market trends," Japic said. "Theres no longer a critical mass of customers who need" targeted visualization products. Instead, the company will use partnerships based on open-source and industry-standard technology to help address customer visualization needs rather than doing so through a dedicated business unit in-house, she said.

SGI also will look to expand its presence in the enterprise space, aiming to rely on such technology as its NUMAflex shared-memory capabilities, and will roll out products that address different price/performance segments of the market, particularly the midrange.

However, it will be an uphill battle for the company, which was delisted from the New York Stock Exchange in November when its stock stalled below $1, and lost $30 million on $144 million in revenue in the second fiscal quarter, which ended Dec. 30.

In its SEC filing, SGI said the value of its current assets had dropped from $452.1 million in June 2005 to $397.3 million in December. During the last calendar quarter of 2005, SGI retained AlixPartners to help with the turnaround plan, which includes layoffs, cuts in procurement costs, shuttering a building at its corporate headquarters and reining in spending.

However, those moves only ensured enough money for 2006, the company said. If business doesnt improve, other alternatives—including more layoffs, bankruptcy and selling the business—could be put into play, SGI said in the 10Q form.

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